Thursday, December 9, 2010

Grow

Start off with the realization that we will take in $2,318B this year and spend $3,608B. This is not some 10 year calculation. It is add up revenue and expenditures for 2010. We're looking for more than $1,290B in annual spending reductions.

Checking the debt clock, today's debt is $13,892 Billion. In today's dollars, someday for 14 years we'll need to run a $1,000 Billion surplus. In FY2010 the Treasury will spend $400 Billion on interest.

Here's how growth helps. If we grow 3% per year for 10 years, we take annual GDP from $14,650 Billion to $19,650 Billion. Federal taxes have historically yielded 18.5% of GDP. Today that number on $14,650 Billion would be $2,637 - which you can see we won't quite make. After 10 years of 3% growth it would be $3,635 of $19,650. Said another way, the $1,000 Billion (one Trillion) a year that you need to pay back over each of 14 years is $4 of every $10 of today's revenue, after 10 years of growth (assuming no more annual deficits in between - I know, I'll let you know how that works out for me), it would only be $2.75 of every $10.

To grow. Small and Medium Businesses (SMBs) create jobs. SMB owners and managers are on the front lines. They see the opportunities daily to make money. The opportunity to make money consists of reallocating resources - production capacity, inventory, labor and capital - from what it is being used for today to something that may be better based on their analysis of risk. The sum of lots of individuals making those judgements, with more of them coming out right than wrong, produces a more economic employment of resources. This is more wealth. This is growth. That's why SMBs produce most of the job growth in the country. They hire to do things they see. Things they see a way to make money at.

What do they need to do this? An environment in which they can see opportunity and in which they can take a good estimate of enough of the future to believe they'll make more money taking the risk than not.

This seems like a contradiction, doesn't it. These folks are the change creators, yet they need stability of the future in order to estimate the risks and rewards of their decisions.

Stability of the future is more about the framework they'll work in than the contents. If the tax impact remains the same, if the government doesn't shift by whim and take over whole industries - think of healthcare as a set of potential small business customers that now doesn't know how it's future is going to work and therefore become uncertain customers, if regulatory frameworks don't shift unpredictably - think renewable power subsidies and requirements turning on and off each year like Christmas lights on a bar, if the rule of law remains enforceable over contract and property rights so that the owner can keep what they make and it isn't going to be expropriated by a government or its government power enabled union, then the spoils will be dolled out to those who pay to peruse them. This will create thousands of people creating growth.

Accurate Reality: To get out of this mess, we've got to balance annual spending first. Then we've got to lock in a predictable framework. After that, growth will help us to take care of the debt repayment by reducing its relative size to the economy. Assuming we cut to balance the budget, then we should be able to avoid default, provided we also print money and reduce our obligations to the debt holders by inflating away their claims.